US Economy

In a way it will be puzzling if the S&P downgrade–despite all the blather about its historic significance–changes anything at all. Certainly, the news should not have come as a surprise: the agency has been talking about it for weeks and the rating for US government debt had been under formal negative review before the announcement. If there is a surprise, it is mainly that the agency had the nerve to go through with it.

More fundamentally, what new information did the downgrade and the analysis supporting it provide? None. After their performance of the past few years, rating agency analysts have, or should have, little credibility in any case. Reports of the initial $2 trillion misunderstanding in S&P’s examination of the Treasury’s books (they used the wrong CBO baseline) lend a tragicomic note, and run their reputational capital down even further. And all this would be true even if US Treasuries were arcane instruments that few investors could afford to monitor carefully, forcing them to rely on the agencies for lack of anything better. In fact, of course, US Treasuries are the most widely and intensely analyzed obligations on the planet. What does S&P know about them that you and I don’t? The informational content of the downgrade is precisely zero.

The global beating shares just took had many causes, no doubt. Still disgusted by the US debt-ceiling fiasco, I am apt to give that masterclass in malice and incompetence more of the blame than it really deserves: the talk in markets today was more about signs of stalling growth in the US and mounting anxieties over Europe than about US fiscal impotence. Still, it can’t help to know at such a time that the US government is clueless and paralysed–or that any US fiscal policies one might recommend (extended payroll-tax relief and unemployment benefits) would have to be taken up by the US Congress. Once it gets back from vacation.

That leaves the Fed and quantitative easing. Weeks ago I said I thought the case for QE3 was strong. At that point, there seemed little chance of it: inflation hawks on the FOMC were asserting themselves. The bad growth numbers for the first half surely ought to be changing their minds. QE3 looks like necessary insurance against a second dip and possible deflation. Now, unlike then, you can accept most of the inflation hawks’ way of thinking and still be in favour of QE3. The facts have changed, sir.

If the test was likelihood of swaying the uncommitted, I saw no winner in last night’s broadcast contest. Obama and Boehner were both addressing mainly their own supporters. Neither rose above partisan talking-points.

The “balanced” approach advocated by Obama makes much more sense, though not because taxing corporate jets is a top national priority at the moment. Bearing in mind what is at stake, tirelessly underlining this point is ridiculous. The best thing about the White House’s approach is that it aims to backload the austerity (eg, by extending the payroll-tax cut). The GOP’s biggest mistake is to want to cut spending as much as possible as fast as possible: fiscally speaking, a self-defeating agenda.

So on the substance, Obama has the better plan–but his talk failed to make this clear. Presumably he thinks the argument for gradualism is already lost. Even if it is, though, his comments were odd. Almost in the same breath as “corporate jets” and “millionaires and billionaires”, he endorsed (admittedly without much enthusiasm) the Reid proposal, which includes no extra revenues. It was as though his remarks were written a week ago. Looking at where Congress stands at the moment, Obama’s main theme—we must have revenues as well as spending cuts–was simply beside the point. Congress is no longer even talking about this.

Robert Shiller cautions against concentrating too much on particular thresholds for debt ratios.

The fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon. They are asking governments to cut expenditure while their economies are still vulnerable. Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures.

The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.

The point about too much tightening too soon is especially important. The idea of fixed thresholds–debt is safe just below 90% of GDP and dangerous just above–is artificial and obviously wrong. On the other hand, the US is right to worry a lot about long-term debt projections–not because these cross some magic threshold, but because the ratio is already high by historical standards and is expected to keep on rising indefinitely. This, rather than debt in excess of 90% of GDP, or 110%, or whatever, is what makes the fiscal position unsustainable. There is time to fix the problem, and doing too much too soon will make matters worse. But that does not mean you ignore it.

Still, Shiller’s point is well taken. He is always worth reading.

Obama’s decision to campaign for a comprehensive budget solution is right, I think, but it came very late. His new posture conforms to the “leading from behind” model of his presidency to date. In the end, he advocates reasonable solutions capable of commanding sufficient support in the country–in this case, a “balanced” fiscal plan that mixes spending cuts with higher revenues–but he has to be dragged there, let alone led there. He gets to the right place reluctantly. It looks like defeat, so his advocacy is much less effective. Peggy Noonan says his intervention is a net negative. I disagree. It’s a net positive, but not nearly as positive as an earlier forceful intervention could have been.

One day this week he explained why he had decided to back the Gang of Six proposal. What was new about it, he was asked? He said it was new because it was bipartisan: for the first time a plan was getting support from Democratic and Republican senators. What? The broad outline of the Gang of Six plan (which is all we have) is very familiar: it is Bowles-Simpson for slow learners. Democratic and Republican senators on the president’s own fiscal commission all voted for a similar deficit reduction plan months ago. Where was the president back then?

Did the anti-tax activist misspeak when he chatted to the Washington Post, or is the following weirdness his considered position? From the Post’s editorial:

With an handful of exceptions, every Republican member of Congress has signed a pledge against increasing taxes. Would allowing the Bush tax cuts to expire as scheduled in 2012 violate this vow? We posed this question to Grover Norquist, its author and enforcer, and his answer was both surprising and encouraging: No.

In other words, according to Mr. Norquist’s interpretation of the Americans for Tax Reform pledge, lawmakers have the technical leeway to bring in as much as $4 trillion in new tax revenue — the cost of extending President George W. Bush’s tax cuts for another decade — without being accused of breaking their promise. “Not continuing a tax cut is not technically a tax increase,” Mr. Norquist told us. So it doesn’t violate the pledge? “We wouldn’t hold it that way,” he said.

Who knew?  Shortly after,  Norquist issued a clarification:

ATR opposes all tax increases on the American people.  Any failure to extend or make permanent the tax cuts of 2001 and 2003, in whole or in part, would clearly increase taxes on the American people.

So he’s against this $4 trillion tax increase–but his tax pledge, strictly speaking, doesn’t rule it out. That does seem strange. What is it about “oppose any and all efforts to increase the marginal income tax rate” that I am failing to understand? Signatories of the pledge have promised not to reduce tax deductions (expenditures)  by so much as one net dollar. But they haven’t promised to stop marginal rates returning to pre-Bush levels, which would raise a net $4 trillion. On what planet does that make sense?

Norquist’s pledge would seem to be a pretty incompetent piece of work, from his own point of view. But look, that’s fine. We need the extra revenues.



Slate’s John Dickerson takes the new Gang of Six plan (whose details are still sketchy) more seriously than TNR’s Jonathan Chait. Dickerson says a small bargain is no easier to get than a grand one, so you might as well be ambitious:

So now that McConnell’s face-saving deal looks as hard to get as the big deal, the big deal is back in play (at least for this sliver of the news cycle). All along the president has been saying that since a small deal was just as hard as a big one, why not go for the big one and at least get the credit? Yes, such a deal would require some kind of creative tax solution that would appeal to the president’s desire for balance. But it would also allow fiscal hawks to point to a big amount of savings as well as cuts in entitlement spending, which they have long sought.

Chait says the House Republicans will simply never agree to it:

In theory, you could image a minority of the House GOP caucus supporting such a plan along with a strong majority of Democrats. But remember that John Boehner needs the support of most House Republicans to keep his job. I suppose it’s possible to imagine a sequence of events in which Boehner supports a Gang of Six-style Grand Bargain, it passes over the objection of most House Republicans, and then Boehner quickly discovers a burning desire to help humanity via a private sector job.

Barring such a scenario, I don’t see how this goes anywhere.

I agree with Chait, mostly. Much as I wish they would, I don’t see how House Republicans can row back from their opposition to any and all revenue increases. But this does not mean that the Gang of Six resurgence is unimportant.

Its real significance–and the reason why Obama supported the new initiative so strongly (without knowing much about what it actually says)–is that it increases the risk to the House Republicans of refusing to agree to any deal. With an authoritative bipartisan proposal back in play, rejecting any and all compromise is a little harder to sustain: the House GOP looks even less reasonable and even more isolated. The political pressure on them to accede to a McConnell-like outcome (which calls for no increase in revenues) thus increases.

In other words, the (apparent) revival of the grand bargain improves the (actual) chances for a small bargain.



A less than electrifying performance. I understand the difficulties and sympathize. There’s little Obama can do in the short term about the refusal of House Republicans to budge. As long as they are willing to destroy the nation’s credit standing if that is what it takes to win, Obama’s choice essentially boils down to capitulation in the national interest or mutually assured destruction. Even so, the press conference was dispiriting. Obama seemed unusually hesitant and unsure of himself. I’m not sure what he hoped to achieve by it.

Alexis Simendinger explains that the grand bargain Obama is demanding is already out of reach.

Writing any legislation takes time, and moving it through the House and Senate could take longer. Even if the president and the eight congressional leaders from both chambers suddenly sprinted to the Rose Garden waving a grand bargain sketched on legal pads, congressional enactment before the default-clock tolls is close to impossible, according to budget experts interviewed by RCP.

That’s why Senate Minority Leader Mitch McConnell took the first stab on Tuesday at an emergency escape hatch. His proposal would effectively abandon Congress’ legislative responsibility to approve the administration’s requests to lift the nation’s borrowing authority, and instead cede Obama the power — and presumably the political blame, should voters object.

Putting aside for the moment details of McConnell’s fallback idea, which appears unlikely to get serious traction among the House GOP, his search for a short-term fix was a signal that the usually canny Kentucky Republican now believes his colleagues need to identify Plan B.

If not McConnell’s stratagem, then what?

Hard to know whether to laugh or cry at the Republican party’s response to Mitch McConnell’s debt-ceiling proposal. One segment of conservative opinion sees it as a shrewd idea, a masterstroke even. Another regards it as a sell-out of historic dimensions. And a third appears to think it is both, and is trying to clarify its position.

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

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